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Birmingham town hall.

Birmingham’s bankruptcy is only the tip of the iceberg – local authorities across England are at risk

The city of Birmingham has issued what is known as a section 114 notice. This signals that the council is unable to balance its budget, due to lack of financial resources.

That the largest local authority in Europe and the second largest city in the UK should effectively declare itself bankrupt should come as no surprise. More than a decade of austerity in English local government has squeezed local councils to their utter financial limits.

Government grants are expected to total £61.7 billion in 2023-24. That represents a £1.9 billion (3.2%) increase in real terms over 2022-23 budget data.

However, this recent reversal in local government funding is not enough to offset the decade-long cuts to government funding. In July 2023, the Office for Budget Responsibility flagged local borrowing as “at risk”. And the National Audit Office has predicted that more is to come. Due to the cost-of-living crisis, the rising need for social care and the continued impact of the pandemic, there is less money and ever greater need.

Our research shows how fragile England’s local government funding system is.

Councils do have limited revenue-raising powers to finance current expenses. Despite this, local authorities across the country have long relied on their reserves, selling property assets, one-off grants, high-risk investments and cheap borrowing for “regeneration projects” simply to stay afloat.

A pedestrian street.
Slough’s section 114 notice, in 2021, warned its deficit could reach £150m by 2024. Justin Kase/Alamy

What happens when councils go bankrupt

Local authorities in England cannot be legally liquidated. Instead, when all other remedies have proven ineffective, the chief financial officer issues a section 114 notice. This bars all new expenditure for a period of 21 days, except for those that safeguard vulnerable people and statutory services.

Issuing this notice signals that the council is unable to bring under control its future expenditure. At the end of this prohibition period, leaders must then decide what to do. These measures generally include cuts to services, increases to local taxation and the sale of property and other assets.

If the external auditors agree with the turnaround plan, this is sent to the national government for approval, before being implemented by elected officials of the local authority or by independent commissioners appointed by the government.

When no agreement can be reached, the Department of Levelling Up, Housing and Communities intervenes. In 2021, Secretary of State Robert Jenrick appointed a panel to take over from councillors in Croydon, in order to ensure that the council would meet its “best value duty” as required by the Local Government Act of 1999.

Section 114 notices are the last resort. Until 2018, these were very rare – the last council to have issued one was the London Borough of Hackney in 2000. Since 2018, however, five councils have issued section 114s: Northamptonshire, Croydon (in 2020 and 2022), Slough, Thurrock and Woking. Coventry has warned it might have to follow suit.

A graffit-sprayed wall outside a factory.
Thurrock declared effective bankruptcy in 2022 with debts of £500m. David Lyon/Alamy

Birmingham officials have cited a new IT system (£100m) installed in 2022 and hosting the 2022 Commonwealth Games (£184m) as triggers for its current dilemma – costs that in themselves are not sufficient to justify the notice. More problematic is the £760 million debt for which the council became liable in July 2023, when the bill of an equal-pay ruling by the UK Supreme Court, dating back to 2012, became clear.

In response to this new bill, Prime Minister Rishi Sunak ruled out government aid to the city, saying it was “not the government’s job to bail out the council for its financial mismanagement”. However, the governance and accounting issues in Birmingham mirror those experienced by all the English authorities that have declared themselves bankrupt in the last five years.

A flawed system

Austerity has seen Birmingham suffer the consequences of debilitating cuts to its government funding. Between 2010/11 and 2019/2020, the city’s total income fell by 17%, leading the council to find savings of £736 million. The need for local services, meanwhile, has spiralled, with the population increasing by 7.5%.

Tensions with council staff, in particular in relation to waste collection, led to an extended strike in 2017. Concerns over the council’s financial management subsequently saw the finance chief, Clive Heaphy, resign in 2020.

Yet, in 2021, the Chartered Institute of Public Finance and Accountancy reported that the city had made good progress.

Following the recent cases of Thurrock and Woking issuing section 114 notices, the Department for Levelling Up, Housing and Communities decided to launch an inquiry into the effectiveness of financial reporting and audit system in local authorities.

Recently, in May 2023, Birmingham’s council leader, Ian Ward, refused to resign, despite a leaked internal report by the Labour party showing a general dysfunctional climate in the local authority. This led to an independent governance review.

Here too, Birmingham is not alone. It takes years for financial issues to become so serious as to justify the issue of a section 114 notice. Governance problems have been widely reported as the underlying cause for Croydon issuing, to date, three section 114 notices.

Local taxpayers have much to be worried about. Distressed local councils often have to increase local taxation to balance their books. To wit, Croydon’s record 14.99% increase in council tax rates.

Vulnerable people too bear the brunt of this. Public services are reduced to the most essential ones. Local workers are dismissed through voluntary or mandatory redundancy schemes.

And the impact is not limited to the local community. Taxpayers across the country end up contributing towards rescuing local authorities.

In May 2023, the cross-party levelling up, housing and communities parliamentary committee criticised the government’s competitive funding system. Councils have to bid for access to government funds, in a system which is fragmented and resource intensive.

In prioritising low-priority projects over long-term investment, the government’s levelling-up agenda is failing to comprehensively address the problems facing local authorities.

At least 26 more councils, including Stoke-on-Trent, Kent and Kirklees, are deemed at risk of bankruptcy in the next two years. Without thorough local finance reform – and a government invested in protecting local government at the service of local people – more could fall.

This article was amended on September 7 2023 to correctly state that it discusses England’s local government funding system, and not the UK’s, as was previously stated.

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